Qatar: Dominating world gas markets

11 September 2009

Qatar is leading the Gulf in exploiting its huge gas reserves, but its long-term future will depend on developing its giant North field

Following the discovery of Qatar’s North West Dome gas field in 1971, it would be more than two decades before Doha even considered exploiting its gas resources. Yet since the first exports of natural gas began in 1997, the small peninsula state has grown to dominate the international gas market.

The crowning glory of Qatar’s extensive gas development programme came in late March, when the first tanker of liquefied natural gas (LNG) arrived at the South Hook LNG Terminal at Milford Haven in the UK. Another jewel will be added to that crown in the middle of next year, when the first consignment of LNG arrives at the Golden Pass regasification terminal in Texas in the US. The shipments are, respectively, the achievements of the Qatargas and Ras Laffan Liquefied Natural Gas Company (RasGas) sister companies, the state-owned guardians of a multi-billion-dollar export programme.

Key Fact

By 2012, Qatar will be producing an additional 46.8 million tonnes a year of LNG

Source: MEED

Yet it will not all be plain sailing for Qatar’s LNG industry. A glut of LNG capacity is due to hit the market in the next few years, just as slowing economies in south-east Asia and the US put a dampener on global gas demand. Much of this new capacity belongs to Qatar, which is already the world’s biggest producer of LNG. Qatargas and RasGas are increasing production capacity to 77 million tonnes a year (t/y) by 2010, from about 43 million t/y today.

By 2012, some 95 million t/y of new LNG capacity is due to come on stream worldwide.

Buyers’ market

“Thanks in part to the project delays of the past few years, you have a huge amount of gas coming on stream just at a time when Japan and others need less, so prices have taken a tumble,” says Tilak Doshi, former executive director for energy at Dubai Multi Commodities Exchange trading platform.

Changes in the regional construction industry over the past few years have exacerbated this glut. Many oil and gas projects faced setbacks during the boom years due to a lack of construction capacity, only for conditions to ease as the effects of the global slowdown hit Gulf economies in late 2008, allowing projects to go ahead. Qatargas 2 train 4 started up this March, more than a year late. RasGas trains 5 and 6 were also delayed by several months.

“Qatar will make a return of about 12 per cent on its LNG even if US gas prices drop to $2.50 a million BTU”

Frank Harris, head of LNG, Wood Mackenzie

“There are other factors depressing the market,” says Doshi. “The US used to be the market that absorbed any gas not taken up by the eastern markets, yet the downturn in the economy and the development of shale gas there has weakened demand.”

Qatar Petroleum (QP), which owns both Rasgas and Qatargas, plans to export about a third of its future gas output to the US. In many respects it is an attractive long-term market in comparison with Asia, where Qatar has to compete with suppliers from Indonesia and Australia. Extensive storage networks and the US’ tendency to stockpile gas reserves also make for a reliable customer.

The problem is price. QP has not disclosed details of the long-term sales and purchasing agreement under which it will sell its gas to US utilities. But by way of illustration, in 2007 US buyers were prepared to pay an average of $7.26 a million British thermal units (BTU) for spot cargoes – sold on a one-off basis rather than under the more traditional long-term sales and purchasing agreement – of Qatari LNG. By comparison, US benchmark Henry Hub prices for natural gas are now about $2.75 a million BTU.

The comparison is a crude one. Many sales and purchasing agreements are index-linked not to Henry Hub but to the oil market, with a shift in crude prices translating into a movement in prices for contracted LNG some six months or more down the line.

“Whichever way you look at it, the gas market for the Atlantic basin is clearly depressed,” says Sam Shoro, senior consultant for IHS Global Insight. “The possible silver lining for Qatar is if oil prices continue to rise, which would probably result in LNG export prices bottoming out in 2009 before strengthening.”

Overstated woes

Yet many analysts argue the current woes of gas producers are overstated. While prices are subdued, perceptions have been altered by the inflated energy prices of recent years.

“If you go back to the days when these long-term agreements were first conceived, they were based on very conservative price estimates of as little as $3.50 [a million BTU],” says Frank Harris, head of global LNG for UK-based consultant Wood Mackenzie. Yet in 1997, even with crude prices at just $10 a barrel, Qatar was able to convince itself of the economics of the first LNG projects. 

“Almost all of Qatar’s gas is bound under long-term contract, and even if energy prices are depressed it still turns a healthy profit,” says Harris. “We estimate it will make a return of about 12 per cent [in 2009] on its LNG exports even if US gas prices drop to $2.50. The timing of these projects is not ideal, but there is no reason to delay production.”

Besides its vast reserves of gas, Qatar has a number of competitive advantages as an LNG producer. The production of condensates as a by-product of the natural gas extraction process effectively bankrolls the cost of production, says Harris. “By the time you are loading your LNG onto a tanker, you have already covered most of your costs.”

The country also benefits from economies of scale. As the size of its individual trains has gradually been increased to 7.8 million t/y from about 4 million t/y, the comparative costs of construction have fallen.

Qatargas and RasGas have also benefited from shared infrastructure at Ras Laffan Industrial City. And, Qatar has further integrated the industrial supply chain by setting up its own transport company, Nakilat, to ship its gas to markets overseas. There is also growing flexibility within sales and purchasing agreements for spot sales, whereby the marketing arm of an offtaker resells to other buyers.

The remarkable spot prices of 2008 created some lucrative opportunities for Gulf producers. Both Qatargas and Oman LNG diverted cargoes destined for the European market to buyers in Asia. Though short-lived, the spate of spot sales also had more significant implications for Qatar and other producers. In the Middle East, energy producers reopened talks on a favourite topic: the creation of a club for gas producers similar to the Organisation of Petroleum Exporting Countries (Opec). These discussions led in January to the establishment of a semi-official three-member club consisting of Russia, Qatar and Iran, which between them account for 56 per cent of the world’s proven gas reserves.

One of the stated aims of the Opec-style exporting club for gas is to develop new pricing mechanisms.

Capital costs

“The huge capital costs of both gasification and receiving terminals mean you will always have some sort of long-term agreement underpinning any LNG project,” says Harris. “Nor are you going to find the likes of Japan relying entirely on the spot market – you would see the lights going out in Tokyo pretty quickly. But you will see more scope for the likes of [UK energy major] BG reselling on contracted gas, and greater flexibility within long-term contracts.” 

Slackness within the global gas market could even encourage occasional spot sales before the end of this year. Qatargas is considering diverting LNG intended for the UK due to poor demand there. Yet Qatar’s future as a gas producer will ultimately be limited less by developments in the global gas market than by constraints to its own supplies.

QP has been observing a moratorium on new gas projects since 2005, due to concerns about the effects of its LNG and other gas projects on the structure of North field.

Though vast – the world’s biggest non-associated gas field is so wide the Earth’s curvature has to be factored into models – the reservoir is still vulnerable to over exploitation.

Officials in Doha say the ban could well be lifted by 2014, by which time the country’s LNG projects will be on stream in their entirety. It is at that point that the scope and tenor of Qatar’s future as one of the world’s greatest gas suppliers will be determined.

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